LESLIE IN FINAL FOR WESTLAW AND LEXIS.DOC 2/19/2009 11:23:57 AM Duke Law Journal VOLUME 58 FEBRUARY 2009 NUMBER 5 JUDGMENT-SHARING AGREEMENTS CHRISTOPHER R. LESLIE† ABSTRACT Antitrust law condemns price-fixing cartels and seeks to encourage private suits against the conspirators by automatically trebling antitrust damages and by providing for joint and several liability. Because the Supreme Court has held that there is no right to contribution among antitrust violators, this creates the risk of a single defendant being saddled with damages significantly greater than three times the amount of the harm associated with that firm’s own market share. Firms engaged in—or accused of—price fixing often try to ameliorate this risk by entering into judgment-sharing agreements, which essentially create a right to contribution through contract. Despite their ubiquity, judgment-sharing agreements have received almost no scholarly attention. Courts and commentators uniformly praise them as a reasonable way for firms to manage risk and eliminate the perceived unfairness of joint and several liability without a right to contribution. Copyright © 2009 by Christopher R. Leslie. † Professor of Law and Freehling Scholar, Chicago-Kent College of Law. J.D., University of California Berkeley, Boalt Hall School of Law, 1993; M.P.P., Harvard University, Kennedy School of Government, 1988; B.A., UCLA, 1986. The author thanks Herb Hovenkamp, Mark Lemley, Steve Marks, Michael Meurer, and Tony Reese for comments on earlier drafts, as well as the participants in Boston University School of Law’s Colloquium on Law & Economics and the participants in Chicago-Kent’s Faculty Workshop. LESLIE IN FINAL FOR WESTLAW AND LEXIS.DOC 2/19/2009 11:23:57 AM 748 DUKE LAW JOURNAL [Vol. 58:747 This Article shows how judgment-sharing agreements can undermine antitrust deterrence and stabilize price-fixing cartels. Using both economic theory and empirical evidence, the Article explains how judgment-sharing agreements may reduce settlement values, lead to the suppression of incriminating evidence, reduce the likelihood of success of meritorious price-fixing suits, and make price fixing cost- beneficial. The Article then argues that fairness arguments in favor of judgment-sharing agreements (and contribution more generally) are misguided and easily disproved, and in any event outweighed by the potential anticompetitive effects of such agreements. Finally, the Article advocates a more informed antitrust treatment of judgment- sharing agreements that takes into account their potential use for anticompetitive purposes. TABLE OF CONTENTS Introduction .............................................................................................749 I. The Development of Judgment-Sharing Agreements....................751 A. The High Stakes of Price-Fixing Litigation ............................752 B. Judgment-Sharing Agreements................................................754 II. The Case for Judgment-Sharing Agreements................................757 A. Benefits for Signatories .............................................................758 B. Benefits for Antitrust Enforcement: Deterrence and Overdeterrence.......................................................................764 III. The Case against Judgment-Sharing Agreements .......................768 A. Judgment-Sharing Agreements Distort the Settlement Process .....................................................................................768 B. Judgment-Sharing Agreements Can Help Conceal a Cartel........................................................................................774 C. Judgment-Sharing Agreements as a Solution to the Prisoner’s Dilemma ................................................................779 1. The Prisoner’s Dilemma........................................................779 2. Cartels and the Prisoner’s Dilemma ....................................781 IV. Balancing the Unfairness and Deterrence Considerations.........785 A. Challenging the Unfairness Critique of the No- Contribution Regime .............................................................785 B. Judgment-Sharing Agreements Undermine Deterrence of Price Fixing .........................................................................795 C. Low Risk of Overdeterrence ....................................................803 D. Balancing Deterrence and Unfairness.....................................805 V. How Antitrust Law Should Address Judgment-Sharing Agreements...................................................................................806 LESLIE IN FINAL FOR WESTLAW AND LEXIS.DOC 2/19/2009 11:23:57 AM 2009] JUDGMENT-SHARING AGREEMENTS 749 A. A Call for Greater Transparency.............................................806 B. Judgment-Sharing Agreements as Unenforceable Contracts..................................................................................811 C. Judgment-Sharing Agreements as Unreasonable Restraints of Trade.................................................................813 1. Per Se Rule .............................................................................814 2. Rule of Reason.......................................................................815 D. Judgment-Sharing Agreements as a Plus Factor....................818 E. Noerr-Pennington Issues...........................................................823 Conclusion................................................................................................824 INTRODUCTION Longevity breeds legitimacy. The longer that a particular form of conduct endures, the more reasonable and uncontroversial it seems. One example of this phenomenon in the context of antitrust litigation involves contracts among codefendants. Defendants in price-fixing suits often enter into judgment-sharing agreements, in which the firms agree by contract to allocate financial responsibility for any private liability among them. For example, if five firms of relatively equal size are alleged to have formed a price-fixing conspiracy, the defendants might agree to each pay 20 percent of the total damages (if any) either awarded to the plaintiff following trial or agreed to in settlement with the plaintiff—even if the plaintiff declines to sue all of the cartel’s members or some of the defendants are found not liable. At first glance, such judgment-sharing agreements (JSAs) seem harmless—a mechanism for defendants to spread risk. And JSAs are widespread, although their contents are generally confidential. Courts and commentators embrace JSAs because they are common and because the contracts appear so desirable at first glance. As their name indicates, judgment-sharing agreements involve sharing, a benevolent act that we are taught to value at an early age. By their terms, JSAs spread risk among firms at risk of liability for high damages. Such agreements seem economically similar to insurance pooling or maintaining a diversified stock portfolio— uncontroversial conduct in any modern economy. Through sharing and risk spreading, judgment-sharing agreements reduce uncertainty and impose some measure of responsibility on every signatory to the agreement. LESLIE IN FINAL FOR WESTLAW AND LEXIS.DOC 2/19/2009 11:23:57 AM 750 DUKE LAW JOURNAL [Vol. 58:747 Despite their ubiquity, no scholarship addresses the potential negative aspects of judgment-sharing agreements. Unfortunately, beyond their benign rationales, JSAs may provide succor to price- fixing conspiracies. This Article explains how JSAs, by distorting the settlement process in private antitrust litigation, can help both stabilize illegal cartels and create additional incentives for cartel firms to conceal price-fixing activities. As a result, JSAs undermine key goals of antitrust law: deterring, exposing, and punishing illegal price fixing. Part I of this Article explains the high stakes inherent in private antitrust litigation and notes the development of JSAs. Antitrust damages are automatically trebled. Both settlements and jury awards in antitrust cases often measure in the hundreds of millions of dollars and can exceed one billion dollars. Price-fixing defendants are jointly and severally liable for all damages caused by their conspiracy. But because antitrust doctrine does not include contribution rights, any single member of the conspiracy could be liable for three times the damages caused by all of the cartel participants. In an attempt to mitigate the harsh cumulative effects of these rules, antitrust defendants asked courts to recognize a right to contribution among price-fixing defendants. Those efforts having failed, many firms lobbied Congress to create a statutory right to contribution in antitrust law. With no statutory relief forthcoming, many price-fixing defendants sought to create contribution through contract by entering into judgment-sharing agreements. Courts, commentators, and members of Congress have generally assumed that JSAs are legal; none, however, has analyzed the potential anticompetitive effects of such agreements. Part II presents the arguments in support of JSAs. JSAs benefit the signatories—defendants in price-fixing cases—by facilitating business planning and allowing firms to spread risk. More importantly, JSAs prevent antitrust plaintiffs from leveraging the threat of enormous liability against individual firms to coerce settlements out of defendants afraid of being held responsible for the bulk of the damages caused by the entire price-fixing cartel. Most often, proponents